The Bad News Keeps Coming
The bad news keeps coming. In the last couple of weeks, New Zealanders have discovered that our country is being touted to tax dodgers and other criminals as a good place to hide their money with no questions asked. Our Prime Minister’s initial response was to welcome the business, however disreputable it might be. It was only when the damage to our reputation became apparent that he agreed to set up an inquiry.
Then, we were alerted by the Morgan Foundation to the fact that our response to international pressure for action on climate change is a sham. We have, in reality, done little to restrain our emissions of harmful gases, but have instead relied on a carbon trading scheme that allows credits to be bought by New Zealand emitters from those who – like foresters overseas – actually reduce gas emissions.
It seems, however, that the credits we buy from foreign traders are not genuine but are issued by countries who are known to be scamming the scheme. Most countries have refused to sanction such a trade, but New Zealand, sadly, goes along with it, and is by far its biggest customer – another shady deal and another blow to our reputation as a good international citizen. We are, it seems, climate change cheats.
And then, we have the saga of the political donation and the Matavai resort on Niue. The facts can be simply stated. The owner of Scenic Hotels, Earl Hagaman – a well-known and perennial donor to the National party – made a donation of over $100,000 to the National party, and a month later his company was awarded the valuable contract to manage a resort on Niue.
The contract turned out to be even more valuable than had appeared at first sight when $7.5 million of taxpayer-funded aid money was paid to Scenic Hotels to upgrade the resort.
In any other country, and especially in those where such deals are commonplace, no one would be in any doubt as to what had really happened. In New Zealand, however, we are naively inclined to accept the blank-eyed, slack-mouthed assurances that it was all a coincidence and that nothing untoward had happened.
We are told by Scenic Circle that Mr Hagaman would not have been aware when he made his donation – one of the largest political donations on record – that his company was in the running for the Niue contract. We may safely assume that Mr Hagaman did not succeed in business by displaying such a lofty indifference to commercial opportunities and that he was not in the habit of shelling out more than $100,000 without any expectation of a return on his investment.
We are then told by the office of the responsible Minister, Murray McCully, that he would not have been aware of the donation made by Mr Hagaman when the Niue contract came to be awarded. Mr McCully, however, is the most inside of National party insiders. It beggars belief that he did not know who was giving what to the National party coffers.
But, say the apologists, it was not Mr McCully who awarded the contract to Scenic Hotels. The deal was done by an independent board. But the board was one appointed by Mr McCully, and – probably without even knowing they were being manipulated – discerned pretty accurately what was expected of them.
Mr McCully, after all, has form – think Saudi sheep. And the more worldly-wise will again recognise all too easily the tell-tale signs of a familiar device; when leaving fingerprints would be risky, set up an intermediary to distance the decision from the real decision-maker.
The chances are that the Auditor General, to whom the matter has been referred, will report, having made a genuine attempt to get at the truth, that it is not possible to reach a definitive conclusion. And that report will in any case be made some months from now, when memories have faded and the issue has dropped down the list of newsworthy items – again, think Saudi sheep.
The government will treat the issue as business as usual – as, sadly, it has become. Its supporters will gladly believe that it was all an invention by political opponents. But this is an issue that transcends party politics.
There are good political reasons for supporting or criticising a government on a whole range of issues, but those issues surely do not include attitudes towards sleaze and corruption. New Zealanders of all political persuasions can surely unite in insisting that the highest standards are met in our public life. The government’s supporters have a special responsibility, since one hopes that the government will listen to them, to ensure that their government understands what is and is not acceptable.
In such issues, perception matters greatly. Unless we make it clear that we are not prepared to accept this erosion of our reputation for probity, the bad news will keep on coming and, little by little, our readiness to accept that erosion will grow. In that case, however, the bad news will not just be for the government but for New Zealand.
Bryan Gould
19 April 2016
The Price of Democracy
Those fortunate enough to have visited Huangpu Park, alongside the Bund in Shanghai, will know about the sign that was supposedly displayed in the Park in the early part of the last century, at a time when the British had taken over Shanghai. The sign was said to have read “No dogs or Chinese allowed.”
Most historians now regard the story as apocryphal, at least in its detail; but whether true or not, it epitomises and justifies a sense of outrage and grievance felt by Chinese at the humiliation imposed on their country by their unwelcome occupiers.
However much we may sympathise with this Chinese sentiment, it was still a surprise to see that the issue – understandably important to the Chinese – had somehow become a significant factor in the debate about our national flag. We have it on the authority of Lewis Holden, the chairman of the Change Our Flag campaign that, at a dinner arranged for the Prime Minister and his National Party colleagues to solicit substantial contributions to the campaign from a group of Chinese businessmen, the donors agreed to pay up because they wanted “the Union Jack gone from the New Zealand ensign.”
The dinner gives the lie, of course, to the story that the flag campaign was non-political. And, as the media reports made clear, John Key was repeating a ploy that had involved a dinner with Dong Hua Liu – an experience from which he seems to have learned little.
Of much greater interest, though, is how what was surely a minority preoccupation in New Zealand terms became a key factor in the flag campaign in a way of which most people were completely unaware and did not in any case have the resources to match.
The RSA’s flag preference was just as strongly felt and their allegiance to our current flag was shared by many more than the Prime Minister’s dinner companions; but the RSA did not have the cash to throw at the campaign and would have been alarmed to know that they were being outgunned from such an unlikely quarter.
The revelation from Lewis Holden, a former National candidate, about the motivations of his benefactors, however, was not the only revealing point he made. He sought to justify the pitch to his Chinese colleagues by saying “That’s the necessary evil of the democratic process – money plays a part….Democratic processes are costly. The more democratic they are then the more costly they are.”
Mr Holden clearly has a curious concept of what democracy means. In his mind, it seems, it is simply a process, in which rivals compete to manipulate public opinion – a competition that costs the participants a great deal of money and where victory goes to whomever can raise and spend the most money.
We see a graphic demonstration of this view of politics unfolding before our eyes in the United States as millions – perhaps in some cases even billions – of dollars are being spent by rival candidates for the Presidency.
In New Zealand, however, we have always regarded democracy not just as a process, expensive or otherwise, but as a form of government that actually represents what people want and that serves their interests accordingly. The true purpose of democracy is not to win the propaganda battle but to elect a government that is accountable to the whole community and not just to a few with money to spend.
Mr Holden’s belief that democracy is like wallpaper – the more you spend the more you get – runs directly counter to that view. It is, however, rapidly gaining ground and taking over our public life. We have fairly sensible limits – at least by comparison with the Americans – on how much can be spent on elections but there is still a huge advantage to those who can tap large resources from private donors to fund their campaigns. That disparity in funding is increasingly a threat to our democracy – a threat that will go on growing for as long as we allow only minimal public funding of political campaigning and leave the running to those with access to the deepest pockets.
It is only occasionally that the lid is lifted on what is really happening. Mr Holden has done us a service by revealing the truth – and alerting us to the very real danger that completely unrepresentative minority views can exercise a disproportionate and hidden influence on how our country is run.
It might have been hoped that the National Party would be particularly alert to the dangers. They have, after all, been burnt in the past by their willingness to take money from donors with a purely sectional interest. Have they so quickly forgotten Don Brash’s disastrous flirtation in 2008 with the Plymouth Brethren?
Bryan Gould
10 April 2016
Is This What We Want To Be?
There is never any shortage of international surveys ranking countries according to such matters as their freedom from corruption, the probity of their public life or the effectiveness and quality of their democracy.
We see frequent reports of them in our media because, I assume, we usually come at or near the top of such ratings. If we are not actually at the top, it is usually because we have been pipped by one or other of the Scandinavian countries.
A friend of mine runs one such international survey and has often congratulated me, as a Kiwi, on yet another good result for New Zealand. I haven’t heard from him on this subject, however, for a year or two, and I notice that we have slipped a little recently in other such surveys I have seen.
The revelation that New Zealand is regarded as, and indeed is, a tax haven for people overseas who want to avoid tax or otherwise hide what they are doing will not, of course, help our reputation in these matters. The worrying thing is that this news comes on top of a series of developments that also point in a downward direction.
It was bad enough to find that a Cabinet Minister could not keep her ministerial responsibilities and her private and family business interests separate – even worse to see that Judith Collins, after a minimal stand-down time, is back as a senior member of Cabinet, apparently unscathed and with reputation intact.
It has also been of concern that our police force seems so anxious to please the government of the day that it will harass those who are seen to cause it annoyance; the cases of Bradley Ambrose and Nicky Hager show how far the executive’s interests now dominate our public life, even at the expense of personal liberties. Those whom the government wants to protect, however – think Peter Whittall – seem to escape prosecution.
And that is to say nothing of the continuing erosion of those liberties in the supposed interests of security, or of issues like the replacement of representative, democratic bodies like District Health Boards or Regional Councils by government appointees when the government wishes to push its agenda and does not seem ready to trust the democratic process.
Then we have those increasing instances where private profit is at stake and the government accordingly chooses to bend or not to enforce laws designed to protect the environment. If a buck can be made, then kauri logs or fresh water supplies or our coastal environment can, it seems, be sacrificed to the government’s version of the greater good. Surely, their attitude seems to be, wadeable rivers are good enough?
There are also those issues where the government gives priority to looking after its friends, rather than to the wider public interest. Think farming and the issues of safety at work and climate change and, even more starkly, Warner Brothers and the government’s willingness to meet their demand that employees’ rights should be reduced.
Then there are the cases, increasingly frequent, where ministers take total executive power and are unaccountable to anyone as to how they use it. Paula Bennett’s power to sell off publicly-owned houses to whomsoever and on whatever terms she pleases is a good (or bad) example.
Perhaps the most obvious example of unfettered executive power was the Prime Minister’s secretly negotiated deal with Sky City, granting them extended gambling facilities in return for a Convention Centre. No one else got a look in – certainly not the public – to the extent that even one of the PM’s own ministers expressed disquiet.
One of the more worrying aspects of this pattern of behaviour is that the democratic process is more and more often sidelined in favour of those who can use their money to buy what they want. If you have the money, it seems, then anything goes. This is the very antithesis of democracy – and providing tax havens for the super-rich is a classic example of that mentality.
We see this approach in many parts of our policymaking and public life. One of the most hotly contested issues worldwide at present is who should or should not be allowed to enter a country and to seek residence and eventually citizenship. That question is largely resolved in our case by putting a price on it. If you have the money, it is more or less the case that you can buy the right to live here.
No one of these instances, taken in isolation, would necessarily set the alarm bells ringing. But it is their cumulative effect that leads to the uncomfortable conclusion that we are now at the top of a dangerous slope and sliding down; that, without realising it, we are becoming just like other countries where it is accepted that government serves the interests of the rich and powerful and the rest of us must live with it.
Apologists for what is happening may say, in private if not in public, that this is the modern world and we had better get used to it. I believe, however, that most Kiwis would rather we stuck to our standards – and they don’t include acting as a tax haven for the disreputable. This is one competition where it is good to be best. It’s one of the things that makes us what we are.
Bryan Gould
6 April 2016
I Have Become Patron of Positive Money, New Zealand – Here’s Why
The truth about money is now being told, and more and more people are listening. Among the most persuasive and authoritative of those truth-tellers is a British-based organisation called Positive Money. I am delighted to say that there is now a New Zealand branch, run by Don Richards and Sue Hamill. I have agreed to become patron of Positive Money, New Zealand.
One of the most difficult issues for the average person to grasp is that a country’s economy operates quite differently from the economy of an individual person or company. One of the main reasons for this is the government’s ability to create money. Whereas the individual or firm must accept that money has, at any given moment, a more or less fixed value, and the quantity in the individual’s hands will be limited by what he, she or it can earn, sell, borrow and so on, a government can overcome a shortage of money by itself creating, or directing the banking system to create, more of it.
One of Keynes’ most often quoted statements is that “there may be intrinsic reasons for the shortage of land but there are no intrinsic reasons for the shortage of capital.” This undeniable truth is often obscured by governments’ reluctance to acknowledge it. The confusion has been compounded by the doctrine of monetarism, which maintains that the quantity of money must be held at a stable level in the interests of controlling inflation; indeed, it is argued that any other intervention by government would be ineffectual, if not dangerous.
The Global Financial Crisis, though, was so terrifying in its threat of financial meltdown that a number of western governments abandoned their ideological prejudices. They followed instead a deliberate policy of “printing money” in a desperate attempt to ward off a crisis of illiquidity as the banking system threatened to implode.
In the US, the Federal Reserve pumped trillions of dollars into the US economy, at a rate as high as $85 billion per month; the result has been that the Federal Reserve’s assets have more than quadrupled to more than $4 trillion. Some of that money helped to increase the pace of recovery, and even to make some impression on unemployment, but much of it found its way more or less directly into the accounts of banks and other major corporations and thence into stock markets, which have accordingly enjoyed a substantial boom.
The UK government, too, undertook a programme of printing money, though on a smaller scale; the programme aimed at a total of £375 billion. Again, the major beneficiaries were the banks. In neither case was there any perceptible impact on inflation from governments using their power to create money through so-called “quantitative easing”.
It is not just governments, though, that create money out of nothing. The banks do so on a much greater scale. The truth of this matter is gradually becoming accepted. A significant milestone was achieved in the first quarter of 2014 with the publication of an important paper in the Bank of England Quarterly Bulletin. In that paper, three Bank of England economists acknowledged that the overwhelmingly greatest proportion of money in the economy – they estimate that it amounts to 97% – is created by the banks out of nothing.
It is widely believed that the banks lend out to borrowers the money that is deposited with them by savers; they are simply intermediaries, it is thought, which charge for the service they provide in bringing savers and borrowers together. The truth, however, is very different.
When a bank lends you money, it simply makes a book entry that credits you with an agreed sum; that sum represents nothing more than the bank’s willingness create money to lend to you. The debt you thereby owe the bank does not represent in any sense money that was actually deposited with the bank or the capital held by the bank. The money that banks lend has very little to do with the savings deposited with them and is many times greater than their total. As John Kenneth Galbraith said in 1976 ‘”The process by which banks create money is so simple that the mind is repelled”.
There are of course many, including a former Governor of our Reserve Bank, who scoff at the proposition that banks create money out of nothing. If they could do so, the argument goes, why would any bank ever go bankrupt? But, as the Bank of England paper points out, when bank loans on mortgage are repaid, they cease to be money. They are no longer available to the borrowers and they are no longer assets in the bank’s books. That is why banks cannot just create money for their own use; the money they create is available only to the borrower. The banks make their profits not by writing cheques to themselves but by charging interest on the money they create to lend to others.
But, for the lifetime of those loans (which could be decades), they will have added to the money supply and to the spending power enjoyed by the borrower. And, by the time the loans are repaid, they will have been replaced many times over by new loans created for new borrowers over years, if not decades and generations. It is no accident that there is a strong correlation between new bank lending and rapid growth in the money supply.
The astonishing aspect of this creation of new money, and to make billions from doing so, is that it is a monopoly power of private profit-seekers – the banks, especially after they moved into the mortgage market and took over from the building societies – and it is directly contrary to the public interest. It means that a huge proportion of the new money in our economy goes into asset speculation, mainly housing, and not into productive investment. The consequent asset inflation has meant that industry has suffered high interest rates and an overvalued dollar and we have all endured a poorer–performing economy, all in the attempt to control a problem created by the banks.
Positive Money aims to ensure that these matters are properly understood and that the power to create money is no longer used on a huge scale to make profits for banks but instead serves the public interest in securing a stronger and better balanced economy.
Bryan Gould
28 March 2016
What Went Wrong?
The crisis in the dairy industry is of course a savage blow to many individual dairy farmers. There is no tougher job than running a dairy farm, and it can only get tougher when the expected rewards for all that effort do not materialise. For some – too many, it will mean the end of the road.
The consequences for New Zealand as a whole will also be serious. There will be many suppliers and traders who will suffer, the general level of economic activity and output will fall, and our perennially worrying trade deficit will get worse.
The crisis has of course been brought about by the worldwide slump in dairy prices, caused in turn by factors, such as increased European production, falling Chinese demand and the closure of the Russian market, over which we have little control and for which we cannot blame our government.
But our policymakers cannot escape all responsibility for our current plight. They are guilty, to use an agricultural metaphor, of putting too many eggs in one basket and of not using the good times to prepare for a rainy day. We have blithely increased our dangerous dependence on a single commodity and have done little to broaden our economic base, with the consequence that we have little to fall back on when the rains come.
The government was happy to take the credit for the dairy price boom. They must now look at how well they managed the boom times to prepare for the tougher times that, in a cyclical industry, would inevitably come. Sadly, they did little.
Indeed, the government has quite deliberately increased our reliance on dairying, by itself providing important financing for capital-intensive projects like irrigation so as to speed up the conversion to dairying – done without regard for environmental considerations and creating exactly the kind of farming that is most vulnerable to falling prices.
And, they have been far too optimistic in assuming that the Chinese market, on which we have become heavily reliant, would go on growing. Even without the current downturn, it is surely prudent to recognise that the long-term Chinese goal is to make themselves as nearly as possible self-sufficient in dairy, as in other products. Free trade agreements, in any case, do not always deliver what they promise – just ask our exporters of wood to China.
But, the apologists will say, as dairying declines, tourism is booming. The tourism industry deserves congratulations on its success; but, before we become too self-congratulatory, we should at least acknowledge that countries that rely on tourism for their foreign exchange earnings are usually found in the ranks of developing economies – countries which struggle to pay their way through selling competitive goods and services into international markets.
Is that where we see our future? And, since our unique selling point is the space, tranquillity and beauty our country offers, can we expect to go on increasing tourist numbers without damaging the very virtues that tourists seek and are willing to pay for?
So, what is to be done? In the short term, it is clearly essential that dairy farmers are able to weather the storm and stay on the land. The banks have a crucial role to play. The Reserve Bank, itself a bank whose primary concern is the health of the banking system, assures us that the banks are strong and secure and have the capacity to withstand any likely losses. That presumably means that they expect little impact on the more than $4 billion record profits that our Australian-owned banks send back to Australia every year.
That may be reassuring, but in a contest between the maintenance of record bank profits and the health and survival of our dairy industry, there can surely be only one winner. The national interest requires that the banks should exercise some forbearance, even at the cost of some short-term dip in their profits.
Lending and borrowing are, after all, matching parts of a single and voluntary transaction. The borrower understands the risks and penalties of failing to repay a loan, but the lender also agrees the deal with their eyes open. They must be ready to stand by their decision to lend and to bear the consequences if the loan is not, or cannot be, repaid. And we must never forget that the money supposedly lent by the bank is created by the bank for that purpose; they are able to charge interest and require security, not on real money but on a book entry.
None of this dissuades the usual suspects from expressing shock and horror that we might look to the banks to play their part in resolving the dairy crisis. For those commentators, it is clear that the farmers can go to the wall, as long as bank profits at their current level are sacrosanct.
The real lesson, however, is this. We will get through this crisis, albeit at a considerable price in both individual and national terms. When we do, we must put in place policies that ensure we are no longer so vulnerable to a downturn in a single commodity.
Bryan Gould
18 March 2016